12 Commodity Channel Index (CCI)

The Commodity Channel Index (CCI) measures the difference between the current price and the historical average price. Basically, it tells you if the price is above or below a given historical average.

Here is the equation:

Figure 8.19: CCI equation

When CCI moves up from below zero to 100, it suggest the start of a new uptrend, and vic.

CC is unbounded, meaning it can go higher or lower indefinitely. This makes it hard to identify overbought or oversold states (e.g., trend saturation) based on a single CCI value. These states of overbought or oversold need to be established by comparison to historical levels of CCI within a given stock.

Figure 8.20: CCI

When CCI diverges from price values in a stock, this may also indicate a weakness in the trend; an early signal of trend reversal.